Markets & Finance

The Charity Sweepstakes

It is a strange thing, really, that in the nonprofit sector, which is defined by giving, generosity, and selfless devotion to others, that there should exist an undercurrent of competition, and intense competition at that. Few people would equate the notion of charity with the very fundamentals of direct competition, yet charities do compete, much like any for-profit business.

They struggle for identity and to promote their brands. They develop and market products and services. They work tirelessly to differentiate themselves in a crowded marketplace. And they compete for capital. The nation's charities require an endless and ever-increasing supply of capital to support their infrastructure and charitable programs. Thankfully, those needs are supplied by the generosity of the American public, to the tune of $260 billion last year, according to the Foundation Center. That generosity ensures that the nation's million-plus 501(c)(3) public charities are able to operate, survive, and in many cases, thrive.

While it may be intriguing to think about white-glove competition among charities for funding, it is even more intriguing to contemplate the competitive battle that is quietly raging among the three major forms of planned giving: private foundations, community foundations, and commercial donor-advised funds. To anyone who questions whether there is real competition, I would answer: "Most definitely yes."

LONG HISTORY. Private foundations—also known as private, non-operating, or "family" foundations—are our nation's oldest and most enduring form of organized philanthropy, with a 100-year history of giving. Today, there are approximately 70,000 private foundations in the U.S., representing approximately $425 billion in foundation assets. Private family foundations gave away nearly $25 billion last year to the nation's charities. It is rare, indeed, that private foundations compete with one another—even though it might appear they do so for top billing on the masthead of Masterpiece Theatre.

Community foundations have been in existence nearly as long, going back to the establishment of the Cleveland Foundation in 1914. These public charities serve as an efficient resource for gathering and distributing charitable funds within a specific geographic community and have in-depth knowledge of both local issues and the nonprofits serving the community. Today, there are some 700 community foundations in the U.S., representing $38.8 billion in assets. Last year, they gave away $3.2 billion. A common offering of virtually every community foundation is a donor-advised fund, which allows donors to set up individual " giving accounts" that are administered by the charity.

A much more recent creation are the "commercial" donor-advised funds, created by financial institutions, which typically custody the assets. Industry giant Fidelity Investments created the first commercial donor-advised fund in 1991. Today, Fidelity's Charitable Gift Fund remains the largest commercial donor-advised fund by far, with more than $5 billion in assets. And with philanthropy becoming a more common component of financial planning, most large financial institutions offer a donor-advised fund option.

HEFTY FEE. Why do these various forms of "organized philanthropy" compete? The answer may be as simple as it is obvious: investable assets. Commercial donor-advised funds charge a hefty fee, generally in the range of 1%-2% of assets, for investment management and distribution services. Spread across $7 billion in commercial donor-advised fund assets, this management fee becomes a very significant source of income for the many financial services companies that are serving the public good while concurrently serving the interests of their shareholders to generate a profit. It should come as no surprise, therefore, that the competition within the financial community to acquire and manage charitable assets is fierce.

For community foundations, the motivation is surely not to generate a profit. Like the organizations they fund, community foundations exist as 501(c)(3) public charities under Internal Revenue Service regulations. Nevertheless, community foundations can only exist when they have the capital resources to support and sustain their infrastructure—the mundane realities of rent, salaries, copiers, and utilities. This capital generally comes in the form of administration fees charged to each account, typically around 1.0% of assets (which is in addition to the investment management fee of 0.5%-1%). In addition to supporting the community foundation's operating infrastructure, I would venture that some of these fees also support the marketing activities directed at attracting new donors, attracting new assets, and generating additional fees to fuel the engine.

By contrast, 91% of family foundations have assets under $10 million, according to IRS data from December, 2004, and rarely have a physical office or paid staff. Also, family foundations are precluded from conducting ongoing public fund raising, so they do not have those marketing expenses.

CADRE OF CONSULTANTS. With so much at stake—literally, tens of billions of dollars flowing annually into private foundations, community foundations, and donor-advised funds—it should come as no surprise that competition for control of those dollars should exist. The competition among commercial donor-advised funds is quite pervasive and very public. Yet a more subtle form of competition exists among community foundations in their struggle for charitable assets.

Faced with the rapid growth of commercial donor-advised funds and the powerful appeal of family foundations, community foundations have been struggling to preserve their donor base and increase their assets. For answers, community foundations have turned to a cadre of consultants and advisers, retuned their marketing messages, and gone on the offensive. Often, the target of their antipathy is the private foundation, for reasons that are not altogether clear—except, perhaps, that private foundations continue to dwarf community foundations in both number and amount of total charitable assets, and thus represent the largest potential source of new donors and new assets.

In a recent review done by Foundation Source of 18 community foundation Web sites, chosen at random, a full 94% underscore the "shortcomings" of private foundations as a basis for considering the "logical alternative"—a community foundation account. As administrator to more than 450 private foundations, we're also seeing an increase in direct-mail campaigns to private foundations urging them to transfer their assets to the local community foundation.

ZERO-SUM GAME? The Community Foundations of America, a special-interest Web site serving the community foundations community (www.communityfoundations.net), takes an even more aggressive stand, promoting a series of articles and self-help guides for use by community foundations that actively promote the termination of private foundations in favor of a community foundation account. Ironically, the Community Foundations of America Web site is co-sponsored by the Council on Foundations, whose membership includes the very private foundations that the Community Foundations of America wants to terminate.

The clear implication to us is that the community foundation community has concluded that private foundations are a direct competitor for the charitable dollars they seek. As a result, capital and human energy that would otherwise be directed at social programs is instead being redirected into an assault on the private foundation sector—as though this is a zero-sum game with only one survivor.

In reality, Americans benefit greatly from a series of choices to express their philanthropy. Each of the major forms of organized giving (community foundations, commercial donor-advised funds and private foundations) has a different mission, serves a different purpose, and appeals to a different constituency. For the greater public good, all three deserve to survive and thrive. The competition between community foundations and commercial donor-advised funds, and their propensity to diminish private foundations is a terrible waste of time and money. In my opinion, the major players should expend less effort diminishing the value of their perceived competitors in an effort to enhance their own station, and more time raising capital and funding good works.